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Has Bahrain got the formula for success?

While the Bahrain Grand Prix is designed to show off the island state’s best side to the world, the country is still struggling to put its economy back on track

By Ashford Fernandez

Fri 19 Apr 2013 11:43 AM

This week, Bahrain celebrated its annual place in the global spotlight. The Bahrain Grand Prix — run since 2004 — is an opportunity to showcase the country, as millions of TV viewers turn their gaze on the Sakhir circuit.

According to Formula Money, the Bahrain race has the biggest local economic impact of any grand prix in the F1 calendar, at around $220m a race. This is more than double the average impact of any other race, and more than 2.2 billion people have either attended or watched the grand prix in the last five years.

So far, so good. The bad news is that the race has also become something of a lightning rod for the unrest between Bahraini authorities and the country’s disparate opposition. In 2011, protests against the event were such that the race was cancelled, and although it went ahead last year, spectator attendance was down. Last week, as protests grew, a series of explosions targeted Manama, including one that was directed at Bahrain Financial Harbour, according to local newspapers.

But Bahrain is still looking to expand on the success of its Formula One event, including potentially using the Sakhir circuit for additional races.

The head of the kingdom’s sovereign wealth fund, Mumtalakat, Mahmood Hashim Al Kooheji recently said there were numerous opportunities to leverage off the Formula One race, including linked events and greater use of the circuit, which is presently used only for the Grand Prix in April.

“There is a lot of potential and... that’s why we are dedicated to really looking at how we can explore that opportunity,” Al Kooheji said earlier this year.

“I don’t see [the Formula One circuit] as an asset, I see it as an opportunity. Frankly, it’s under utilised. And we can get a lot of value from this.

“We can see there’s a lot of potential and when I say that, it’s not just money. We have spent a lot of time, a lot of our investment in the team, in the company to really study what [we can do] and which one will do and how we will do it.”

Mumtalakat already has allocated $42m for new tourism and event initiatives in 2013, but none were related to the Formula One, Al Kooheji said. The company would look to compliment the existing event, he added.

“What we want to do is develop such an event [that would result in] a big international event to be established in Bahrain,” he said.

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Al Kooheji said the Formula One had become the primary image of Bahrain overseas and attracted a huge number of international visitors each year, making it a profitable business for the island nation.

“I remember many years ago when I was on the street in New York when I mentioned Bahrain people remembered [the national airline] Gulf Air. Now when I go and mention Bahrain they know the F1,” Al Kooheji said.

“So [the F1] we have is an opportunity. There is a lot of value in Formula One.”

Needless to say, F1 is only a small part of the economic story. Despite claims that GDP would grow by up to five percent in 2012, Bahrain’s economic growth slowed sharply in the final quarter of last year as growth in hydrocarbon output stalled and two years of social unrest weighed on the banking sector. The kingdom’s economy grew 3.4 percent in full-year 2012, government figures showed, compared to a median forecast of 3.5 percent in a Reuters poll and up from 1.9 percent in 2011 when the government crushed pro-democracy protests.

The small non-OPEC oil exporter has reported a decline in crude output from its key Abu Safa field shared with Saudi Arabia, which accounts for around 70 percent of budget revenue.

Output in the hydrocarbon sector, which accounts for a quarter of Bahrain’s $30bn economy, grew by a mere 0.4 percent in October-December from the previous quarter and plunged nearly eight percent on an annual basis.

Growth of Bahrain’s gross domestic product, adjusted for inflation, slowed to 0.5 percent quarter-on-quarter in October-December from a revised 2.8 percent in the third quarter. On an annual basis, the growth rate decelerated to 2.7 percent from 3.3 percent, the data showed.

The country of 1.3 million people has based its economic strategy on becoming a regional financial hub as it lacks the petrodollar wealth of its Gulf Arab neighbours. The plan was dealt a blow from the political violence of 2011, in which the island’s Sunni Muslim rulers crushed protests led by the Shi’a Muslim majority.

Lingering unrest continues to knock confidence in Bahrain’s economy and growth of the financial industry, which makes up around sixteen percent of GDP, slowed in the final quarter of 2012. Last month, the central bank governor forecast 2013 economic growth of around four percent, much less than the 6.2 percent the government’s Economic Development Board predicted in February. That is still more optimistic than the latest Reuters survey in which analysts trimmed their 2013 growth forecast to 3.2 percent from 3.5 percent seen in September, partly due to the ongoing unrest. The country is the only GCC member facing a fiscal deficit this year.

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In the financial sector, which makes up roughly a quarter of the economy, the Central Bank of Bahrain is preparing to crackdown on banks operating in the kingdom, with a set of tougher regulations the governor expects will lead smaller banks to merge and survivors to reduce profit expectations.

In a shock announcement earlier this year, CBB governor Rashid Mohammed Al Maraj said the central bank would target a select group of banks declared “domestically important financial institutions”.

The changes were intended to strengthen the country’s crucial financial sector but Al Maraj said he also expected it to lead to consolidation in the market.

There are 405 registered financial institutions in Bahrain and the financial sector contributes 23 percent of Bahrain’s GDP compared to six percent for the entire GCC.

Al Maraj said the CBB was working on a new concept to classify banks that were domestically important financial institutions, which would face tougher regulation but were more likely to be able to meet them. The details would be announced imminently, he said.

“We have over the past year and since this issue [of strengthening the finance sector] came about we’ve taken an exercise to identify which ones represent the most domestically important,” he said.

“I think some of the banks will be surprised with what I’m saying now because we’re on the verge of issuing those names and communicating with those banks that have been selected as domestically important financial institutions, which will put on them certain requirements.

“Those requirements, because of the nature of the business, the complexity of the business and the size of their market control will necessitate of them to comply with additional requirements,” he added.

The requirements include increasing the level of capital relative to debt, although Al Maraj did not provide details.

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The chief executive of Bank of Bahrain and Kuwait (BBK), Abdulkarim Ahmed Bucheery, said the sector had expected new regulations but he was surprised to learn they would be targeted towards specific institutions. He expected the “domestically important financial institutions” to be identified according to their market share, suggesting ten percent could be the benchmark.

Bucheery said those banks would likely be able to easily meet the requirements. “We are always ready to comply, we have to make our manouvering to comply with them and to benefit from them,” he told Arabian Business. “In the past banks would just leverage themselves, make returns north of 20 percent. Today, you’re very lucky if you make anything upwards of ten percent return. So it’s become very different.”

Al Maraj said while the new regulations would make it more difficult for banks to operate, they were crucial for the sector.

Banks had endured a “sort of stress test” during the “difficult” period since the global financial crisis. However, the positive results of the banks clearly demonstrated the “soundness and the robustness” of the banking system in Bahrain.

“What matters to us is to ensure the soundness of our banking system,” he said. “The shocks that we have seen as the result of the financial crisis could have catastrophic effect on our banks and if not for measures we have taken and for the collaboration of the banks we could have seen much worse situation during this crisis.”

Banks should no longer expect to see massive growth and the days of large profits were history.

“This is a regulated industry and it should behave like a regulated industry, not as a start-up... that would expect 20-30 percent [profit],” Al Maraj said. “I think those days are gone. [The new regulations will] make it even more difficult for these banks to achieve the figures that they’ve achieved in the past, not only in Bahrain but globally. The expectation should be more modest than any other sector.”

The CBB also is continuing to encourage consolidation of the banking industry, where six retail Islamic banks and eighteen conventional banks are all vying for business in a country with a population of only 1.2 million.

“This has been a policy of the Central Bank of Bahrain… to encourage further consolidation and we’ll continue to do that. As we move with more successful mergers this will be good incentives for others to follow suit. [But] there’s no enforcement.

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“We’re entering a period where there’s no room for small banks. The requirement is going to be very challenging, the competition in the market is becoming very forceful and I think this will make it difficult for small banks to survive and to achieve results… that are in line with what’s been achieved over the years.”

He expected successful mergers and acquisitions to encourage others to follow.

“Mergers and acquisitions… provide stronger banks, which in turn are more able to… develop a much stronger base to withstand economic downturns,” he said.

In many respects — and from the economic perspective — the challenges that Bahrain faces are not unique to the country; competition in the banking sector and a soft real estate market are hallmarks in most of the other Gulf countries right now, for example.

But perhaps its biggest asset lies in its well-educated and well-skilled workforce. Bahrain does have one outstanding card in its favour in comparison to the rest of the GCC; more locals are employed in the private sector than the public sector. In Saudi Arabia, around 90 percent of locals work in the public sector, a challenge that the government is finding it tough to solve. For Bahrain, the key is to continue to bring in high-value-added industries.

Bahrain’s imports rise by 21% in 2012

The value of commercial goods that were imported into Bahrain rose 21 percent to $273m in 2012, local media reported, citing a government official.

Khalifa Al Shomeli, Customs Affairs’ director of Sea Ports Customs, told Gulf Daily News that the number of containers imported into the Gulf state during the 12-month period also rose to 89,832 from 85,818 as a the result of a new computerised clearance system.

“Clearance procedures used to take two to three days, but thanks to the computerised system it now takes a maximum of fifteen to 30 minutes,” Al Shomeli told the newspaper.

“It also shows that local trade has been revived and Bahrain has regained its reputation as a business hub and a logistic area for the Gulf,” he added.

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According to Al Shomeli, the new system records data related to the types of goods being imported and exported and then ties this to the person involved.

“This way it can feed all remaining customs branches, whether sea, air or land, information about imports and importers as well as exports,” Al Shomeli said. The system also allows for quicker identification of smugglers, he added.

More than four-fifths (82 percent) of imports came through the country’s sea ports, the report said. The remaining imports come through Bahrain International Airport and King Fahad Causeway, the road link between Bahrain and Saudi Arabia.

Bahrain, Japan sign deals to increase joint investment

Japan and Bahrain have signed a range of agreements designed to promote economic cooperation and joint investment between the two countries.

Thirteen memorandums of understanding and agreements were signed between ministries and private sector companies in the fields of healthcare and pharmaceuticals, education and training, oil and gas, and financial services.

The agreements were signed during a five-day state visit by a senior Bahrain delegation led by Prince Salman Bin Hamad Al Khalifa, the Crown Prince of Bahrain and chairman of the Economic Development Board (EDB). The delegation visited the cities of Osaka and Tokyo, with the aim of strengthening bilateral relationships and to highlight opportunities for investment in the Gulf kingdom.

Kamal bin Ahmed, acting chief executive of the EDB, said: “We are delighted at the success of the delegation’s visit to Japan.

“Bahrain and Japan have long shared a profitable economic partnership and today’s announcements pay testimony to the benefits that both our countries can gain from working together.”

Dr Esam Fakhro, chairman of the Bahrain Chamber of Commerce and Industry, added: “We are very happy to announce such a wide range of economic agreements across a number of sectors that play an important role in both our economies. We look forward to developing these relationships in the future.”

Japan is one of Bahrain’s major trading partners and Bahrain is also home to a number of major Japanese companies including Nomura Securities, Toyota Training Centre, Yokogawa, Daiwa Securities, Yamato Kogyo and SBI Pharmaceuticals.